Wednesday, 30 April 2014

The UK’s Failed Challenge to the Financial Transaction Tax: Keep Calm and Wait

By Steve Peers

‘In capitalist countries, the bank robs YOU’. Rightly or
wrongly, this phrase sums up the reaction of many EU citizens (as well as many
of those outside the EU) to the bank bailouts and austerity of the last few
years. The reaction to these concerns has been a series of populist measures by
the EU – a restriction on short-selling (upheld by the CJEU), criminal penalties for market abuse, and a possible financial transactions tax (FTT).

As widely expected, the CJEU today ruled against the UK’s
legal challenge to the plans of a group of EU Member States to impose an FTT.
In the form proposed by the European Commission, the FTT could possibly do
significant damage to the UK’s financial industry, based in the City of London.
So at first sight, the failure of the UK’s legal challenge today looks like a
significant setback to the City. However, in reality it is no such thing, since
the UK will still be able to bring a separate legal challenge to the FTT, if
and when it is finally adopted – and such a challenge would have a much better
chance of being successful.

Background

Far from being a ‘one size fits all’ template, for many
years EU law has provided for a number of different possibilities for some
Member States to go ahead and adopt EU measures without all Member States
participating. This is known in EU jargon as ‘differentiated integration’.

The best known of these possibilities are the rules on the
EU’s single currency (along with some related rules on bailouts and economic
governance) and on EU Justice and Home Affairs Law. But also there is a lesser
known possibility for some Member States to go ahead without the others in any
area of EU law, known as ‘enhanced cooperation’.

This possibility was first introduced by the Treaty of
Amsterdam (in force 1999), but it was subject to strict rules, such as a de
facto veto for each Member State. To make it easier for these rules to be used,
particularly in light of the planned large enlargement of the EU, they were
amended by the Treaty of Nice (in force 2003). They were amended again by the
Treaty of Lisbon (in force 2009), and they have been used in practice three
times since that point.

The first use of the enhanced cooperation rules was to adopt
a Regulation on the choice of law in divorce in 2010. This proved
uncontroversial. Secondly, the EU agreed in 2011 to create a unitary patent for
a large number of Member States. Spain and Italy could not agree to the details
of this proposal, since they wanted equal status for their languages. They
brought a legal challenge to the Council’s decision to authorise enhanced
cooperation in this case, but the Court of Justice of the European Union (CJEU)
dismissed this challenge in 2013.

The third use of the enhanced cooperation procedure was to
authorise a group of Member States to adopt an FTT. As noted already, the UK’s
challenge to the decision authorising the FTT was dismissed today.

So why is the UK’s failure today not really a significant
setback? The reason is that enhanced cooperation is a two-step procedure. First
of all, the EU Council authorises a group of Member States to go ahead in a
particular area. These authorisation decisions do not go into any detail about
the law concerned. Secondly, the EU institutions then negotiate the details of
the legislation which will apply to the participating Member States. This is
known as the measure ‘implementing’ enhanced cooperation.

When the enhanced cooperation procedure was used for the
first time (as regards choice of law in divorce), the Council very quickly
agreed on the measure implementing enhanced cooperation. However, on the second
occasion when this procedure was used (the unitary patent), it took nearly two
years for the EU to adopt the legislation implementing enhanced cooperation.
This was due to a need to agree these implementing rules with the European
Parliament, as well as very difficult talks between Member States on a separate
treaty creating a Unified Patent Court, particularly because it was hard to
agree (among other things) where that Court would be located.

Similarly, although the Commission proposed legislation to
set up an FTT back in 2011, and tabled a revised version of this proposal in
2013, once the EU authorised enhanced cooperation as regards the FTT, the
participating Member States clearly appear to have difficulties reaching
agreement on this proposal (each of the participating Member States has a
veto).

Certainly, the Commission proposal is objectionable from the
UK’s point of view. It provides not only for taxing transactions which take
place in the financial markets of the participating Member States (reasonably
enough), but also for taxing transactions which take place in the financial
markets of non-participating Member
States – as long as one of the parties to the transaction is located in a
participating Member State. To this end, the proposal would deem a British bank
to be a French bank (for instance) in certain circumstances.

There is a very good argument that this proposal violates
the EU’s rules on free trade in the internal market, and interferes with the
taxation powers which would normally belong to the UK and other participating
Member States. The EU Treaties require any enhanced cooperation to be
consistent with those rules. Indeed, it is widely known that the EU Council
legal service believes that, for these reasons, the Commission’s proposal would
be illegal – if it were in fact adopted.

While the CJEU today rejected those arguments at this stage
of the process, this was simply because the final shape of the FTT has not yet
been decided. It is entirely possible that the participating Member States
might not agree on an FTT at all, or that they might agree on an FTT which does
not contain such elements.

Even if they do agree to adopt the Commission’s proposal,
the UK will be able to challenge that Directive when the time comes. Similarly,
some of Spain’s detailed arguments against the legality of the unitary patent
have been raised in a second legal challenge (still pending) which that country
has brought against the legality of the EU measures implementing enhanced
cooperation in this field.

Conclusion

If the UK had been successful today, it would have ended any
prospect of an FTT for the time being. Its failure keeps the prospect of an FTT
alive. But because the Court of Justice rightly did not rule on the merits of
the UK’s case against the Commission proposal – simply because that proposal
has not yet been adopted – the UK has only lost a minor skirmish, not the war.

The mere fact of bringing this legal challenge has made it
clear to the participating Member States that the UK will vigorously defend its
legal position, and may therefore have contributed to their difficulties in
agreeing to the Commission proposal. And the government’s legal action,
although unsuccessful, may yet play some role in ensuring that an FTT, if one
is finally agreed, does not have an extraterritorial scope.

Without extraterritorial features, an FTT would of course
not raise as much money. Then again, the UK could also reduce its budget
deficit if it could (for instance) collect a toll from drivers on German
motorways, or tax all the cheese bought in France. The absurdity of these
scenarios shows why a future British legal challenge to the final FTT, if such
a challenge is necessary, would have a much greater chance of success.

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